Analysts use different methods to discount cash flows: https://www.investopedia.com/articles/professionals/072915/d...
Finding R (what to discount by) can be difficult to do: https://www.investopedia.com/articles/investing/021015/advan...
I don't work in IB or PE so take what I put with a grain of salt, just what I've learned.
Also, you know markets aren't near efficient when people invest in $ZOOM and not $ZM and when Elon tweets $TSLA stock is too high.
You can look at daily gainers and losers and watch them over the course of the week. They are extremely volatile.
If you're talking about the S&P500 it's a little easier to do. A little over 50% of the value of S&P 500 is the top 50 companies by weight. The top 100 equate to 70% and the top 250 equate to 90%.
This does provide one plausible answer to the headline question from TFA: Corporations' expected future profits are lower than they were pre-COVID, but the valuation discount rate is lower because the expected future return for assets in general is lower, so the present value of corporations' expected future profits is the same-ish as it was pre-COVID.
[0] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...
Stocks are based on expectations of future profits, i.e. psychology. "In the long run, the stock market is a weighing machine. In the short run, it's a voting machine."
Few investors' psychology will let them look at a year of bad news and still think "Oh, it's going to get better in the future." After about 3 months you start doubting yourself and wondering if maybe you were wrong in the first place, and you've entered a brave new world where people randomly die and commerce or long-term plans are impossible. All of the economic data - corporate earnings, employment, share prices, etc. - will reflect the new normal, so there's no reason (other than your memory of what the '10s were like) to believe that share prices would always go up.
Computing this depends on estimating/forecasting/extrapolating/guessing a lot of values. E.g. what kind of revenue growth the company will have. How the structure of company expenses may change. Parameters like a discount rate make a huge difference in the estimated value. In many cases the majority of the value for a discounted cash flow valuation of a stock comes from the tail term where you give up trying to unroll the contribution for each year and make a simpler approximation of what the company will be doing 20 years+ in the future.
The computed share value has a lot of sensitivity to adjusting some of these inputs, and in many cases it is not at all obvious what values parameters should be set to.
Many of these are permanent consequences that will absolutely effect earnings 15-20 years in the future. The market seems to be pricing in an assumption that this will be a blip: we'll reopen, businesses will rehire, and 2021 will look much like 2019. I don't believe that's likely.
Take my mother in law as example. Hard core shopoholic. Amazon and QVC packages coming in daily. Hair nails etc done weekly at salons. Now for two weeks silence. She lost her job and empty bank account hit her like reality check. Shes on her way to a friend - they will do each other hair and nails. And when I told her it will all go back to normal on January 1st, so many people died she tells me “i am not going out anyways for very long time”
1 - https://www.cdc.gov/nchs/nvss/vsrr/covid19/excess_deaths.htm
This is especially worrying, now that the US military is barring previously hospitalized COVID survivors from enlisting and not allowing waivers.
That's almost certainly a temporary policy because of the lack of information enacted with the expectation that it will be evolved based on future information, not something that should make the lack of information more worrying.
Regardless, who knows? I'm just curious to know
https://www.cdc.gov/nchs/nvss/vsrr/covid19/excess_deaths.htm
https://www.nytimes.com/interactive/2020/04/21/world/coronav...
If you have a patient at your hospital and you are able to give them a covid diagnosis, you get $8k from the federal government. If you can put them on a ventilator for a few minutes, you get $35k from the federal government. This is intended to help offset the costs of care for covid patients to healthcare providers. You can get a covid diagnosis by having some of the sympoms... like coughing, weakness, shortness of breath, etc. I imagine it's difficult to die from anything without some weakness or shortness of breath. So it is very easy to say the patient had "covid-like" symptoms, and put covid as the cause of death.
Now, keep in mind that at the same time, healthcare providers are furloughing and laying off workers. Since "non-essential" care is on hold, there's not enough work for people to do in most places in the country. This places healthcare providers in a difficult moral position where they can inflate a number and keep their employees on payroll, or strictly follow it and lay everyone off.
One easy way to help with this data issue is to simply differentiate the deaths where a person had covid-like symptoms vs a death where a person actually tested positive for covid.
What's clear is society now seems to be willing to let COVID run its course (and kill discriminately) as long as we keep below hospital capacity. If we allow that to happen, then we'll reach herd immunity, regardless of vaccine availability, within a couple of years.
Let's just hope it doesn't mutate.
I’m giving some background because it means kids and children today have antibodies created by the innate system that fights off novel coronavirus. Which means their adaptive system will be able to remember and fight back against this virus. This means mutations, specifically this means weaker general strains in the future akin to the cold/flu.
Let me put it this way.. RSV is a nasty respiratory illness but we as a species survive quite well along side it even if it happens to kill a few babies and old people every year
Risk adjustment.
1-Risk of death/bankruptcy for companies.
2-Risk of reduced consumer spending. This can happen because people are in financial shock, or because unemployment stays high. Perhaps some of these layoffs aren't "furloughs." Some of these businesses won't survive, like many restaurants. My expense is your revenue, but I won't spend if I don't feel "safe" physically and financially and if I don't have a job, well... On top of which, what if some part of society stops going out?
3-Risk of permanently slowed economic activity due to coronavirus spread in trading partners.
4-Risk that the vaccines don't work out and there is no "time after corona." Even if this risk is small, it is non-zero, and catastrophic.
Thats the theory. In practice stock prices wildly oscillate around expected value (which is a gradual curve up and to the right), with no apparent logic. As shiller points out in irrational exuberance, stock markets do not consistently reflect expected long term returns.
... but I find that most people who complain about irrational markets lack the conviction to bet against it.
Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy?
*edit: If anything, the economy will prosper because Corona has forced every company into the 21th century by requiring remote work and digital workflows.